If you are in the process of buying a house or thinking about buying a house, you might be wondering how the closing process works. When buying a house who pays the closing costs, the buyer or the seller?
This can be confusing for first-time home buyers. The closing costs are all the fees that are paid at the time of closing. These fees include the lender’s fees, title search and title insurance fees, mortgage insurance premiums, appraisal fees, and any costs associated with finalizing a mortgage.
Both the buyer and seller pay fees at closing, Typically, the buyer pays most of the fees required for closing. However, the seller will likely pay more actual costs at closing because they pay the real estate agent’s commissions and any of the fees associated with transferring the property.
What are the buyer’s closing costs?
A buyer should anticipate paying around 3-5 percent of the purchase price at the time of closing. This is in addition to the down payment required on the home. Although the down payment is a separate payment paid at closing, some lenders will combine the two and refer to it as “cash due at closing”. Typically, closing costs are paid separately.
Buyers closing costs include:
The origination fee is a fee that lenders charge the home buyer to pay for the set up of their mortgage. It covers the administrative expenses for verifying and processing your mortgage, or the costs to “originate” your loan.
A mortgage company will require an appraisal of your home before they will lend money to you. This is how they make sure that your home is worth the value of the loan.
Mortgage discount points
Some lenders allow home buyers to reduce the interest rate of their mortgage by paying some of the interest on their mortgage at closing. This amount is usually one percent of the mortgage amount and will reduce the amount of interest you pay over the course of your loan.
Title search and title insurance
This may be paid by the buyer or seller. A title search is required at closing. This makes sure that the title is clear, and that there are no leans on the property or that someone else can’t claim the title. Title insurance covers the home buyer if a dispute comes up later about by someone trying to claim ownership of the title.
Mortgage Insurance Premium
Some mortgages require buyers to pay for mortgage premium insurance. This can be expected on a government mortgage such as an FHA or USDA loan, and other loans that don’t require a 20% down payment. Mortgage insurance is basically insurance that covers the lender if you should default on your loan.
An escrow account is created when you finance your mortgage. It is used as a prepayment of your property taxes or home owner’s insurance. This way the lender has a buffer to make sure your insurance and taxes are always paid.
Sellers closing costs include:
Title Search and title insurance
This is usually paid by the buyer, but depending on the terms of the agreement, the seller may pay the fees for a title search and title insurance at the time of closing.
Transfer taxes or recording fees
When a home changes ownership, your state or local government may charge a tax or recording fee for transferring the property. The seller will be required to pay any prorated remaining taxes on the property.
Any outstanding amount owed on the house
If the property has a lien or judgment against it this must be paid at the time of closing.
Real estate agent commissions
The seller generally pays for all the realtor commissions involved in the sale, including the buyer’s agent commissions and sellers.
Can you ask the seller to pay the closing costs?
Closing costs can always be negotiated when you buy a home. Negotiating is typically part of the process of buying a home. According to Zillow, 81% of sellers will make some concessions when selling their home to help the sale goes through. Negotiating with the seller on the closing costs can be a way for you to afford more of the upfront costs of buying a home. The seller may not agree to this, but with the right offer, this is certainly possible.
While it may seem unlikely that a seller would want to cover the cost of closing, with the right offer some sellers will consider this option. Usually, when a seller agrees to pay the closing costs, it is because the buyer has agreed to pay a higher purchase price. This increase in the purchase price offsets the cost they will pay at closing. It’s a way for the buyer to get into the home and provides the seller with a reason to work with them.
Not all sellers are in the position to cover closing costs though. And, even if the seller agrees to cover the closing costs, most mortgage lenders will only allow the seller to contribute a certain amount towards closing costs. Depending on the type of loan you have, the seller may be able to contribute anywhere from 2-6% of the total purchase price towards closing costs.